“There is a sword of Damocles hanging over the head of every American. Sadly, it is about to drop.”
We know that the Fed has kept interest rates low for many years until recently. Why did it do so? Here are some of the reasons we have been told:
- The Fed wanted to stimulate the economy.
- The Fed wanted to make it easier for Americans to borrow.
- The Fed wanted to create a “wealth effect” to encourage spending.
Which of these statements do you think explains the primary reason for the Fed’s decision to keep interest rates low? Don’t bother. It is none of the above.
The primary reason the Fed kept interest rates low was to avert an economic catastrophe. Today, that catastrophe can no longer be avoided. The trigger for the economic explosion is the rising interest payments on the federal debt.
Let’s go through the numbers.
During the eight years of the Obama administration, our total national debt rose from $12.3 trillion to $20 trillion while interest rates sank to a new all-time low. (The national debt figure includes money owed by the government to itself. The debt held by the public is what interests us since the government must pay out the interest to those bond holders.)
In 2009, the year President Obama took office, the national debt held by the public was $7.27 trillion. At the end of fiscal 2016, that had soared to approximately $14 trillion. Given that our marketable debt doubled from 2009 to 2016, it’s remarkable that the annual cost of the interest on the debt rose far less, from $185 billion to $223 billion.
The long march of rising rates that began recently is a dramatic reversal after nearly 40-years of declining interest rates. The new trend portends a return to more historic rates. You may be asking: what are the historic rates? We calculate that the average rate paid on the federal debt over the last 30 years was close to 5%.
The non-partisan Congressional Budget Office (CBO) has just raised its estimate that debt held by the public will rise to $17.8 trillion in 2020. Some economists believe that the figure will be much higher. For our exercise though, let’s stick with the CBO estimate. We are postulating that the interest rate on our national debt may return to the long-term, 30-year average of 5%. Note, too, that Treasury debt rolls over every 3 to 4 years so the maturing bonds at low interest rates will be refinanced at the then current higher rates.
Read the full article on The Street: Beware of the Coming Economic Debt Bomb | The Street